4 ways to get out of debt faster
Debt, especially revolving debt (like credit card debt) can be difficult to get on top of. In fact, 46% of Canadians carry a credit card balance every month. Yikes.
The good news? It IS possible to break the debt cycle and get on the path to financial freedom.
1. Use “found money” to pay it down
Almost everyone will encounter “found money” throughout the year; basically money outside of your regular paycheck, like a tax refund, bonus at work, gifted money, etc. Although it’s super tempting to use this “extra” money for something fun, using it towards your debt is a smart way to make a good dent in it. If you have multiple debt products (like credit cards, lines of credit, etc.) make sure you put money towards the product with the highest interest rate first.
2. Create a budget
This might sound obvious, but half of Canadians are living paycheck to paycheck without much insight into where their money is going.
The first step to making a budget is knowing how you’re spending now. Go through your finances for the past three months, categorizing your spending (ie. rent/mortgage payments, groceries, dining out, etc.). You might be surprised to see where your money’s going. After you’ve done that, you can start creating your ideal budget in each of the categories, including how much you’ll be allocating to your debt every month—hopefully along with a savings budget for something that will add value to your life (like a down payment or travel fund).
When you have your budget done, ideally you should have your fixed costs (bill payments, rent/mortgage payments, savings) automatically coming out of your bank account, with the rest in a ‘Spending Account’ (like the MogoCard). That way, you won’t blow the budget.
3. Get a side hustle
Having a side hustle is becoming the norm for a lot of Canadians, especially Millennials. Think about what skill you could monetize, whether it’s a freelance writing/design job you could do outside of work hours, dog walking on the weekends, or moonlighting as a server.
Here’s the catch: You'll probably be tempted to use the extra money for other things in your life. So make sure you’re disciplined and stay focused on transferring your extra pay directly towards your debt.
4. Consolidate it
Sometimes the best way to get on track with getting out of debt is to consolidate it. If you have revolving debt, like credit card debt, you're probably stuck in what feels like an endless cycle of debt. Revolving credit comes in the form of a credit card or line of credit that lets you immediately re-borrow what you paid back on principal. And many revolving credit products allow you to pay back only the interest.
Credit cards in particular are psychologically proven to make it easy and convenient for you to stay in debt. In fact, people spend an average of 12-18% more when making purchases using a credit card. In reality, the interest rate you have on a credit card might not make a difference in your spending habits; whether you get a 5% or 30% rate, you’re likely to shop and borrow in the same way. It’s the perfect recipe for ongoing debt.
If you’re caught in this cycle, a personal installment loan can be a great option.Unlike credit card debt, an installment loan has a specific term and requires you to pay back interest and principal in every payment, which means you have a set deadline for paying it off and getting out of debt.
If you have a credit card with $10,000 owing at a 19.9% interest rate, and you’re only making the 2% minimum payment each month, it’ll take you 83 years to pay it off. Maybe you’ll be able to be diligent and pay it off over a year, but if you’ve struggled with the revolving debt cycle, temptation is likely to make that revolving credit look appealing again. If you were to consolidate that same $10,000 debt by paying it off with an installment loan, you could be out of debt in as little as 5 years.**